Royalty changes hit oilfield service providers hard

Canadian oilfield services stocks swooned over fears Alberta government’s new royalty regime would erode margins for one of the worst hit segments from the oilpatch.

The structure, announced on Friday, is “one more aspect to worry about for oilfield services,” according Mark Westby, analyst at Calgary-based AltaCorp Capital Inc.

“In addition to significantly decreased oil prices resulting in lower activity and pricing pressure around the oilfield services space, the royalty framework will create an additional incentive to push down drilling and completion costs,” Westby said.

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CIBC World Markets analyst Jon Morrison, however, believes concerns within the new royalty regime’s impact on oilfield services are misplaced.

“If you appear specifically at some of the pressure pumpers, there’s some broad speculation the royalty review will be negative from service providers’ perspective,” Morrison said, noting he believes ongoing market dynamics and oilfield equipment supply and demand will dictate oilfield services pricing.

Vital for hydraulic fracturing, pressure pumpers such as Calfrac Well Services Ltd. (down 13.1 per cent), Trican Well Services Ltd. (10 % decline) and Canyon Services Group Inc. (down 11.9 per cent), suffered heavy losses Monday as concerns over the new structure were compounded by oil prices crashing seven per cent.

Contract drillers Trinidad Drilling Ltd. and Precision Drilling Corp. also fell together, with both down more than nine percent. The new royalty regime will be implemented in 2017.

With oil prices falling 72 percent over the past 18 months, the Canadian oilfield services have been hardest hit within the oilpatch, leading to direct and indirect job losses in excess of 28,000 related to the segment this past year, according to the Canadian Association of Oilwell Drilling Contractors.

The industry body said it will closely monitor the mechanics of the new drilling and completion cost-allowance structure, as it is “not clear how well costs will be determined given the dramatic collapse in drilling and repair rig rates.”

“The government would be unwise to calibrate well costs in the current pricing environment. These prices are uneconomical for the service industry and cannot be used to set up a benchmark,” Mark Scholz, president of CAODC, said in a statement Friday.

CIBC’s Morrison believes that oilfield service providers could cast their net wider in search of better margins in competing energy jurisdictions such as Saskatchewan, B.C. and the Usa, as oil prices recover.

“The market would discover that oilfield services capacity would shift to those regions to maximize economic returns for shareholders,” Morrison said.[email protected]